Air Trade: Promises — and Pitfalls — in the Coming Carbon Market

Market mechanisms for controlling pollution and other environmental problems, once considered experimental, have recently become favored tools for regulation, both in the U.S. and abroad. In the last several years, a $64 billion global market for carbon dioxide permits and offsets has emerged out of international deal-making on climate change. The carbon market has become a force to be reckoned with in international trade, and created many stakeholders with vested interests in the design of the market and its governing regulations. Driven by the international finance community and clamor from the general public for action on global warming, U.S. legislators are under increasing pressure to adopt similar measures. And as action by the U.S. seems more likely, industries that would likely be targeted by climate change legislation are becoming less obstructionist, increasingly seeking influence over the direction of regulation rather than attempting to block it altogether. Given current trends in business, finance and politics, it is likely that in the near future, the U.S. will adopt carbon pricing as a means to decrease carbon emissions and attempt to halt the progress of climate change. However, with so many stakeholders in the debate, designing the market will be a contentious and highly politicized process. Because of both scientific uncertainty and political factors, there is great potential for market failures, from miscounted emissions to perverse incentives to social inequity. This thesis examines some of the market designs that have been proposed, along with reasons why the carbon market is likely to fail to live up to its greatest promise.

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